Report from Russia

Foreign bio/pharmaceutical companies, including many of the leading global players in patented and generic drugs, are starting to invest heavily in Russia under the expectation that the country will remain one of the world's fastest growing drug-manufacturing markets. Bio/pharmaceutical sales are increasing at around three times faster than the country's GDP. By 2016, total revenue in the Russian bio/pharmaceutical market is forecast by market researchers Frost & Sullivan to reach more than $37 billion—that's 2.4 times higher than 2009 levels and equivalent to an annual growth rate of 13.5%.

The Russian government is hoping that investments by multinational drug companies will help modernize drug production in the country. The government wants the Russian bio/pharmaceutical sector to reach Western standards of drug manufacture and innovation, which the industry has a long way to go to achieve.

The latest government initiative has been the launch of a state fund that will invest jointly with foreign sovereign wealth and private equity funds as much as $50 billion in priority areas such as bio/pharmaceuticals and healthcare. This money will supplement 120 billion RUB ($3.7 billion) of state money announced late last year under the country's Pharma 2020 program. Those funds will be allocated to upgrading bio/pharmaceutical manufacturing, including the introduction of new production technologies in more than 160 facilities.

The initial aim behind the Pharma 2020 strategy is to raise the share of domestic production in Russia from a meagre 20% of total drug sales to 50%. A separate goal aims to increase domestic production of vital medicines to 90% by the end of the decade.

Prime Minister Vladimir Putin has warned that restrictions will be imposed on multinational manufacturing firms, now comprising most of the top 10 drug suppliers in the country, if they do not set up local production facilities and transfer their technologies into Russia.

"The Pharma 2020 goals can be achieved only if the domestic bio/pharmaceutical industry becomes innovative through partnerships with international pharmaceutical companies and Russian academia," says Oleg Korzinov, director of the Center for Development at the Moscow-based bio/pharmaceutical Cluster Northern, the country's first innovative pharma cluster.

The drugs of international bio/pharmaceutical companies with a local manufacturing presence are likely to be favored by an expanded state-reimbursement scheme covering high-cost therapies. "A local plant will be the entry ticket into the Russian market and an improved healthcare system," explains Martin Schlow, a Russian pharmaceuticals specialist at the management-consulting firm PricewaterhouseCoopers (PwC).

As a result, there have been a series of recent announcements by top global players, including Novartis, AstraZeneca, GlaxoSmithKline, and Pfizer, about investing in manufacturing and R&D projects in the country. In addition, leading generic-drug producers such as Dr. Reddy's Laboratories and Teva Pharmaceuticals are strengthening their Russian manufacturing capabilities.

The Russian government initially expects foreign companies to help bolster innovation in drugs but ultimately wants those companies to assist in giving the country a platform for becoming a major producer of APIs.

Establishing such a position will be a big task because currently only 15% of APIs in medicines on the Russian market are made in the country. More important, only 10% of the country's 400 bio/pharmaceutical plants comply with GMP standards.

Many of the multinational companies setting up plants in Russia are using centralized API production. "Due to reasons of economies of scale, all active pharmaceutical ingredients will continue to be manufactured at our large active ingredient plants in Denmark," explains Mike Rulis, head of communications at Novo Nordisk, the Danish insulin maker, which is building an insulin plant in Russia's Kaluga region.

The largest barriers to API production in Russia include a "lack of a long tradition of API exports, absence of binding rules pertaining to approval of the production and the quality control of drugs [and] a low level of training of specialists in international requirements like GMP," says Monika Stefanczyk, head pharmaceutical market analyst at PMR, a market researcher in Kracow, Poland.

Nonetheless, PMR believes that with the aid of the Pharma 2020 program and a new law-making GMP certification that becomes obligatory by 2014, Russia has the potential to become an alternative center to China and India for API production.

Progress will depend on how long Russia takes to establish a thriving bio/pharmaceutical manufacturing market, which currently is relatively small in per capita terms. "The limited affluence of Russian society restricts drug consumption and this is not expected to change in the near future," says Dominika Grzywinska, a Frost & Sullivan research analyst.